MUMBAI, March 9 (Reuters Breakingviews) - A dealmaking boom in India’s banking sector has an unlikely loser: the government. Canadian insurance holding firm Fairfax Financial (FFH.TO), opens new tableads, opens new tab the race to buy a ​61% stake from Indian state entities in $13 billion IDBI Bank (IDBI.NS), opens new tab, Bloomberg reported in February, citing sources. An $8 ‌billion transaction would be the largest-ever foreign direct investment in a local bank. But crystallising a premium valuation looks challenging.

A deal would complete a full circle for the lender hardest hit by an asset quality crisis: in 2018, bad loans comprised nearly one-third of its portfolio. Provisions for that ​sour pool eroded its capital base and prompted New Delhi, which then owned 86% of IDBI, to press state-backed ​Life Insurance Corporation (LIFI.NS), opens new tab to pump in 216 billion, opens new tab rupees, or $2.4 billion at current rates, to raise its 8% ⁠stake to 51% in 2019.

The Reuters Iran Briefing newsletter keeps you informed with the latest developments and analysis of the Iran war. Sign up here.

LIC now holds 49% of IDBI’s shares and the government owns 45%. Selling a 30% stake ​to Fairfax at the latest market price would fetch the insurer a 136% return on its 2019 investment. New Delhi would be ​worse off, though: the lender’s shares trade lower than they did 13 years ago.

Yet even current multiples may be difficult to fetch. IDBI’s shares are trading at about 2 times forward book value, almost twice that of similar-sized rivals Yes Bank (YESB.NS), opens new tab and IDFC First Bank (IDFB.NS), opens new tab. Throwing in employee liabilities, restructuring ​costs and the likely absence of indemnity clauses gives the buyer a strong case for a discount.

An abundance of takeover targets ​has hurt New Delhi, too. Launched in 2022, the slow-moving sale process of IDBI prompted early potential bidders to look elsewhere: last year ‌Sumitomo Mitsui ⁠Banking Corporation (8316.T), opens new tab bought a 24% stake in Yes Bank.

With Emirates NBD (ENBD.DU), opens new tab still in the reckoning with Fairfax, it’s a two-horse race to own IDBI. Both bidders already have a foothold in India’s credit market: the Dubai-headquartered lender is set to take control of the $2 billion RBL Bank (RATB.NS), opens new tab and Fairfax owns $675 million CSB Bank (CSBB.NS), opens new tab.

That chips away at any shred of bargaining power left with the sellers, ​who can hardly demand a ​control premium. Regulations cap voting ⁠rights of private bank shareholders at 26%. That puts the new owner effectively at par on voting decisions with LIC and the government, which will hold a combined 34% after the sale. ​To maximise takings, officials could ask the central bank to relax the voting rule. The ​other option is ⁠to reduce their total stake to well below 26%.

Otherwise, New Delhi risks catching the weak end of India’s banking M&A wave.

Follow Shritama Bose on LinkedIn, opens new tab and X, opens new tab.

Context News

• Fairfax Financial Holdings is the frontrunner to buy a majority stake in IDBI Bank, Bloomberg reported on February 27, citing ⁠unnamed people ​familiar with the matter.
• Valuing the 61% stake that the government and the Life ​Insurance Corporation of India hold in IDBI at the current market price of about $8 billion could make it the biggest foreign direct investment in the country’s ​banking sector, the report added.

For more insights like these, click here, opens new tab to try Breakingviews for free.

Editing by Antony Currie; Production by Ujjaini Dutta

• Suggested Topics:
• Breakingviews

Breakingviews
Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at and follow us on X @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

Share

• X

• Facebook

• Linkedin

• Email

• Link

Purchase Licensing Rights

Shritama Bose

Thomson Reuters

Shritama Bose, India columnist, joined Breakingviews in November 2022. She covers the financial sector and related topics from Mumbai. She was earlier a reporter at Financial Express, a top business daily newspaper, tracking the Reserve Bank of India, lenders and fintech companies. She has a bachelor’s degree in English Literature and a postgraduate diploma in journalism.

• Email

• X

• Linkedin